Only the tough still stand

The relative calm in the North American OSB market during the past year has brought welcome respite after the roller-coaster ride of the preceding five or so years, which saw mill after mill shut down – some for good – and removed billions of square feet of capacity.

All told, though, 2010 was a year that had promised little; and pretty much that’s what it delivered.

The year started off with an air of optimism, but as 2010 progressed it became apparent that improved business in the first  half was created by the US home buying tax credit which significantly boosted OSB demand and prices by the end of April. Once that was gone, demand stuttered again. By the year’s end, the hoped-for 700,000 US housing starts turned out at around 600,000.

On the plus side, there were no more announcements of permanent OSB mill closures during 2010 – although there remain a handful of indefinitely shut mills whose futures are, at best, debatable.

Overall, it would be fair to say that, if you were a North American OSB producer still in business by the end of 2010, you had a fighting chance of seeing happier days.

In this survey last year, WBPI reported that four more OSB mills had been permanently closed and another 7.8 billion ft²/year of non-permanent, market-related shutdowns were ongoing.

In terms of overall permanent capacity, nothing much has changed. Actual North American OSB production is still trailing capacity by some margin and none of the remaining projects proposed and/or started during the boom era in the middle of the last decade have been completed, gone on line, or been permanently abandoned (not publicly, at least).

Signs that the US housing market is recovering have been, at best, inconsistent, though as reported last year, one thing the recession did achieve was to reduce the very high dependency of OSB producers on that one market segment.

The number of companies in the OSB business has, however, shrunk during the past year.

Georgia-Pacific LLC (GP) acquired most of the operating assets of bankrupt Grant Forest Products Inc in May 2010 and in February 2011 Ainsworth Lumber Co completed the acquisition of the remaining 50% of its Alberta joint venture with Grant – Footner Forest Products Inc.

Ainsworth has no immediate plans to restart the Footner OSB mill, which has been shut since late 2007.

In terms of ranking – assuming that GP’s indefinitely closed OSB mills were all to come back on line, and that it brings on-line Grant’s never-finished mill in Clarendon County, South Carolina – the Atlanta, Georgia based forest products giant has a similar level of North American OSB capacity to Norbord, with around five billion ft²/year.

However, GP (a private company under the ownership of Koch Industries) will not confirm capacities, and some of the offline mills – notably Dudley, North Carolina – are small and have been closed for a long time. Until that Clarendon mill comes on line, GP’s total OSB rated capacity is 4.24 billion ft², so Norbord, with the 4.42 billion ft² of North American OSB capacity confirmed in its 2009 annual report, is still second in the North American rankings after Louisiana-Pacific (LP) with 5.26 billion ft²/year (including the volume currently produced at the Hayward, Wisconsin, siding facility), and GP is third.

Capacity versus output
Total rated capacity for the North American market is 28 billion ft²/year (28,033 million ft²) but that includes several mills with a questionable future whose owners have yet to officially lay them to rest.

A more accurate figure for rated capacity would remove Grant’s Timmins, Ontario, mill (520 million ft²/year), closed since September 2006 and the only Grant OSB mill not taken by GP last year; GP’s Dudley mill (170 million ft²/year); Longlac, Ontario (170 million ft²/year); Tolko’s small Slave Lake mill (250 million ft²/year); and Weyerhaeuser’s Wawa, Ontario, mill (470 million ft²/year), for a total of 26.4 billion ft²/year (26,453 million ft²).

With so much of the remaining capacity, and the indefinitely shut capacity, in the hands of private companies, it is harder to place a figure on actual production for 2010. But if one takes the capacities of the other indefinitely-curtailed mills away from that 26.4 billion ft², the rated capacity currently on-line is under 21 billion ft²/year.

Of that figure, as both LP’s and Norbord’s management noted in recent conference calls, many operational mills are not at full capacity, and it is probably going to take a lot less volatility in the US housing market before we see many, if any, idled mills, from any producer, coming back on stream.

LP’s OSB mills operated at 63% of capacity during 2010 – 50% if you include the two indefinitely-closed mills. In the February 10, 2011 conference call, Rick Frost confirmed that two of LP’s 10 North American OSB mills remain indefinitely shut: Chambord, Quebec (470 million ft²/year), and Clarke County, Alabama (750 million ft²/year). Of the remaining eight, only three were running at full capacity, and the rest “on some type of a flex schedule,according to Mr Frost.

LP has stated it has no plans to start up any of its idled mills during 2011. In February’s conference call, Mr Frost said LP was not planning on running the curtailed Clarke County mill this year “because we don’t think there will be a need for it”. Using that mill as an example of what’s required to restart a shuttered OSB facility, he explained it would take “about 10 months from the time that we make the decision to do it to be making a healthy supply of board”.

Mr Frost also noted that there was a significant cash outlay required – around US$7m – to hire and train workers and to bring raw material inventories up to speed.

Norbord has two idled mills – Huguley, Alabama (500 million ft²/year) and Jefferson, Texas (415 million ft²/year). Its operating  North American mills ran at about 90% of capacity during 2010, compared to 80% in 2009, the company reported on releasing its year-end financial statements at the end of January 2011. Including the two indefinitely closed mills, Norbord’s North American operations ran at 70% of capacity in 2010, compared to 60% in 2009. Company executives made clear in their January conference call that Huguley and Jefferson would remain off-line during 2011.

Coy as Georgia-Pacific is on its mill capacities, a spokesperson did eyeball the data we have, and we’re fairly sure if any of GP’s indefinitely-shut mills had re-opened, the company would have said as much. Therefore, our understanding for GP is that the following mills remain indefinitely shut: Dudley, North Carolina (170 million ft²/year), Mount Hope, West Virginia (375 million ft²/year), Grenada, Mississippi (375 million ft²/year), and the never-finished Clarendon County, South Carolina (800 million ft²/year), which is one of the two new mills acquired with the Grant assets in 2010. We restate the belief expressed last year that Dudley’s chances of ever reopening are slim to none: it is a very small mill by today’s standards and GP now owns two state-of-the-art mills four times its size in the neighbouring state of South Carolina. Mount Hope has been offline for most of the past two years.

Ainsworth Lumber Co is probably the survivor that suffered the most during the turbulence of recent years. By 2009, it had permanently closed all three of the Minnesota mills it acquired from Potlatch in 2004: Bemidji, Grand Rapids and Cook, with a combined capacity of 1.18 billion ft²/year.

Its Footner joint venture in Alberta with Grant Forest Products, which Ainsworth now owns outright, has been indefinitely curtailed since late 2007. The company also stopped plans to build new mills in Manitoba, British Columbia and New York state; and its second line in Grande Prairie, Alberta – nearly finished when construction was halted in 2006 amid spiralling costs and slumping OSB markets – has yet to be completed.

“The question is when; it’s absolutely going to happen,said Ainsworth’s Bruce Gibson in February, referring to the completion of the Grande Prairie mill. “All the major equipment is on site. It just depends how much we want to spend.”

Mr Gibson said the company has first to make the decision to complete construction – which depends on the market – then it could take six to 18 months to bring it on line. He noted that the quicker that is done, the more costly it will be.

Strategically, he said, the second line at Grande Prairie is a value-added plant, though the extent to which it produces commoditygrade and/or value-added OSB will depend on market conditions.

100 Mile House in British Columbia is already predominantly value-added and recently added a third drying line that could ultimately boost capacity, which currently stands at 440 million ft² per year.

Mr Gibson said Footner is expected to reopen and that its design capacity is 860 million ft²/year, though it was not running at that capacity prior to its curtailment. This survey has had it down as 700-750 million ft²/year for several years. According to Mr Gibson, Footner and the second line at Grande Prairie will be among the largest, most technically advanced, mills in North America.

“We got rid of capacity that was old and was going to take a lot of money to upgrade,he said, referring to the former Potlatch mills in Minnesota: three older, commodity-grade OSB mills located in a US state in which wood fibre costs have historically been high.

Adding the eventually-to-be-opened Grande Prairie Line 2 (620 million ft²/year capacity), and Footner, to Ainsworth’s currently online mills, including Grande Prairie Line 1 (690 million ft²/year) and Barwick, Ontario (480 million ft²/year), places Ainsworth fourth in the North American league table, with rated capacity of a little more than three billion ft²/year (3,090,000ft2).

Of Weyerhaeuser’s seven remaining North American mills, one is still indefinitely curtailed: Wawa, Ontario (470 million ft²/year). In February, the company learned that it had not been allocated a Crown wood supply to feed the mill and even prior to that news, in November 2010, the company had stated that the likelihood of Wawa reopening was slim.

Weyerhaeuser did reopen its 550 million ft²/year Hudson Bay, Saskatchewan, mill in October 2010, though only on two out of four shifts, according to reports.

In total, the rated capacity of  Weyerhaeuser’s existing OSB mills, including those currently indefinitely closed for market reasons, is 3.48 billion ft². (Remove Wawa and it goes down to slightly more than three billion ft² (3,015,000ft²), fractionally below Ainsworth’s).

Huber’s capacities are impossible to confirm with the company. If all existing mills were running to capacity, Huber’s total production would be 2.1 billion ft²/year.

Tolko Industries confirmed in February 2011 there had been no change to the status of its mills. Only one – Meadow Lake, Saskatchewan, capacity 640 million ft²/year – is operating. High Prairie, Alberta (640 million ft²/year) has been offline for market reasons since February 2008; and both its new Athabasca Division engineered wood facility (800 million ft²/year) in Slave Lake, Alberta and its smaller, older, Slave Lake mill (250 million ft²/year) which was going to be switched to value-added production to support the new facility, remain indefinitely curtailed.

The 820 million ft²/year Peace Valley, British Columbia OSB mill, which is a joint venture between Canfor Corporation and LP, has remained operating during the recession, though at what capacity is unclear.

Canfor’s PolarBoard mill, with a rated capacity of 640 million ft²/year, has been indefinitely curtailed since 2008.

Martco Limited Partnership (Roy O Martin) has just one mill: in Oakdale, Louisiana, with a rated capacity of 850 million ft²/year.

Arbec Forest Products’ small OSB mill (170 million ft²/year) in St Georges de Champlain, Quebec, acquired from Tembec Inc in 2006, appears to have survived the recession. We’ve also had no reason to believe there has been any change in status of the 440 million ft²/year Langboard mill in Quitman, Georgia.

New mills still on hold
Almost all the new projects started or announced during the boom era have either been spiked or construction indefinitely stalled for several years.

Despite the woes of Grant Forest Products, which led to its bankruptcy and GP’s acquisition of most of its OSB assets, Clarendon County in South Carolina may have a good chance of getting up and running reasonably quickly, once market conditions improve.

There were reports in recent years that the almost-completed 800 million ft²/year mill had been cannibalised for parts for the sister mill in Allendale County, but both Grant and, subsequently, GP have said Clarendon County was being maintained with a view to starting it up when the market allows. In June 2010, local media reported a GP spokesperson saying Clarendon could take a year to complete.

It’s anybody’s guess whether, or when, Huber Engineered Woods will start work on building the new mill in Emanuel County, Georgia. The company itself will not discuss its plans, and we have been unable this year to get any update from Emanuel County, which has been willing to speak of the plan’s progress in earlier years.

Strange as it may seem, given it was announced just prior to the market nosediving, the proposed Arizona Forest Restoration Products (AZFRP) mill in Arizona still seems to be bubbling along with sufficient activity to suggest it is far from dead. The project was greeted at the start with scepticism, mainly because it would depend on US Forest Service wood fibre, and what business likes to place its future entirely in the hands of the federal government?

Yet in February, 2010, AZFRP said in a release it had successfully completed its second round of funding and was ready to engage in the permitting process for the OSB plant at Winslow.

AZFRP president & ceo Pascal Berlioux stated at that time: “We are now fully ready and fully funded to initiate immediately the half million dollars permitting process, as soon as the proper contracting mechanisms can be worked out with the Forest Service, and we are willing to commit to innovative approaches. We look forward to partnering with the existing northern Arizona logging and processing wood industry to create 600 jobs, boost rural economic development to the tune of US$170m per year, and reduce the risk of catastrophic wildfires at landscape scale over the next 20 years”.

Arizona is home to the largest contiguous tract of ponderosa pine forest in the world; almost all of it under US Forest Service management. It’s also a drought-ridden state that has had its share of catastrophic wildfires, so linking the prospect of a large, wood-consuming facility that could both benefit forest health and boost the local economy, garnered widespread support for AZFRP’s plans. Even so, governments often move more slowly than a truckload of OSB in a market slump, and the mill’s fibre supply still has yet to be confirmed.

It’s rumbling on though: On January 3, 2011, AZFRP announced that Mr Berlioux had been appointed to the Arizona Governor's Forest Health Council, which he said “continues to be instrumental in translating the vision set out in the Statewide Strategy for Restoring Arizona Forests in on-theground treatments”.

Mr Berlioux told a local news outlet in February this year that the Four Forest Restoration Initiative – the first step of which calls for restoring ponderosa pine across about 750,000 acres within the Kaibab and Coconino national forests over 10 years – was “a quantum leap forward.. . .It creates an opportunity to build an appropriate-scale small-diameter wood industry as an economic engine to help pay for restoration”.

At the time of going to press, however, Mr Berlioux had not confirmed whether there is a new timeline for construction to begin on the OSB mill.

Challenges ahead
The existing OSB producers, meanwhile, are looking to 2011, and to a greater extent 2012, for clear evidence the US housing market is in recovery, and both Norbord and LP drew attention in their conference calls to some of the challenges they face when that recovery comes.

Norbord’s Barrie Shineton noted that a broader economic recovery could drive global commodity prices higher, potentially putting pressure on raw material prices, particularly resin. “Should the housing recovery lag the general economy, these increased costs could be difficult to pass on to customers,he said.

Mr Shineton also noted that, in Europe, government biomass energy incentive programmes could put even more pressure on wood fibre availability and price. In response to an analyst’s question on the biomass competition factor in North America, cfo Robin Lampard said there had been some fibre price pressure, “but nothing like in Europe”.

The bigger story in North America, Lampard said, was on phenolic resins, which account for 25% of costs (wood fibre accounts for 35%).

For LP’s Mr Frost, the “early concern for this year for 2011 is increasing raw material cost escalation, particularly anything related to energy or energy derivatives.

“At this point we are expecting our raw material cost to increase by about the magnitude that they did last year, in 2011, and I think that the oil price is the big unknown variable”.

Housing holds the key
Overall, said Mr Frost, the key issues standing in the way of recovery in housing starts to a more normal level are little changed: the large inventory of foreclosed homes; depressed home prices; and the large number of US homeowners with mortgages for more than their homes are worth.

Furthermore, he noted, unemployment needs to be going down and consumer confidence going up. RBC Capital Markets analyst, Paul Quinn, said in a February 11 commentary on LP’s financial results that the first half of 2011 would be difficult for building materials companies, with growing foreclosures and declining home prices.

Mr Quinn noted that the current consensus for US home starts in 2011 is 700,000: “up almost 20% from the 596,000 starts in 2010”.

These figures are all still substantially below the long-term annual average of 1.5 million starts a year.

The boost in demand in the first part of 2010, created by the US home buying tax credit, caused OSB prices to jump 117% from the end of 2009 (US$182/msf) to the end of April 2010 (US$395/msf), Mr Quinn noted.

Expecting the second half of 2011 to bring signs of a more sustainable recovery, he said: “In effect, 2011 is appearing to us as the mirror image of 2010. Our OSB forecast of US$215/msf is very close to the US$219/msf average of 2010”.

Rick Frost concurs that the first half of 2011 is likely to be slow, with an improved second half.

“We are not yet getting any indications from our customers that they expect a big spring build or a surge in activity,said Mr  Frost during February’s conference call. “My assessment of our customers is they are still very lean on products. They are taking a wait-and-see approach before tying up their cash in inventory.”

Barrie Shineton reported in January 2011 that Norbord is also seeing the beginning of a slow US housing market recovery and expects that to start taking hold in the second half of the year.

“I believe the worst is behind us,he told analysts in January. “Today, Norbord has a strong balance sheet, we are cash flow positive and we have, I believe, successfully managed through the toughest downturn in our industry’s history. We are approaching the recovery phase of this housing cycle.”

Mr Shineton said he also expects overall OSB demand in 2011 will look very similar to last year. “It's my view that the general economic news will continue to improve and unemployment levels will fall throughout this year, leading to more positive new home construction activity and improving OSB demand and prices in the second half,he said.

While generally positive, the industry is moving into the recovery phase, Mr Shineton said, but the bigger issue was how much supply is going to operate.

“There is installed capacity, particularly in North America, that well exceeds any demand numbers we might forecast for this year,he said. “We are forecasting for moderate improvements in demand, but the issue I think – for the industry – is how much capacity is likely to operate, and how that plays out in terms of supply and demand balance.”

According to RBC Capital Markets’ Paul Quinn, Norbord itself is likely to maintain its 90% production rate at its operating OSB mills. He noted that Norbord had “done a good job of diversifying end-markets, with now about two-thirds of their OSB sold into the repair & remodelling and industrial markets via big box retailers”.

But the likelihood of any more colossal changes, this year or next, on the scale the North American industry has seen in recent years seems to be receding.

In a February 11 commentary on LP’s financials, Mr Quinn noted there was “next to no inventory in the distribution network, which in turn has shrunk approximately 40% since its peak in 2005. Meanwhile, On the producer side, matching production to demand can be difficult in this environment as companies are reticent to add shifts, and when they have, to take them off”.

Mr Quinn said in a January 31 commentary on Norbord’s financial situation: “We forecast prices will rise to US$225/msf in 2012 as the US housing market recovery gains momentum. Those low inventories of panels in the distribution chain, however, increase the likelihood of periodic price swings as small demand/supply shocks have an outsized impact on markets”.

Nonetheless, Mr Quinn observed: “The outlook for North American OSB markets is better than it has been for many years, without exaggeration. Housing starts have stabilised (albeit at very low levels) and expectations are for employment also to show improvement through the year, which should support the gradual clearing of the backlog of unsold existing homes”.

While some analysts on LP’s recent call appeared puzzled as to why there had not been more consolidation in the OSB market during the prolonged downturn, Mr Frost said he personally anticipates no further changes in the North American industry’s structure over the next year.

“It’s over-simplistic and you’ve heard me say it – everybody laughs at me when I do – but there aren’t any sissies left in this business,said Mr Frost, noting that everybody left in the OSB business in North America, for one reason or another, likes it and apparently wants to stay in it.

Whatever the wisdom of wanting to stay in the OSB business, given this particular market’s volatility in the past decade, you have to acknowledge that those that are left are made from strong stuff: they’ve ridden some ferocious waves, made tough choices, slimmed down their organisations and reluctantly put a lot of good people out of work; in many cases permanently. They’ve come out at the other end no doubt feeling the worse for wear, but ready to take advantage of what hopefully will be better days ahead.

And they most certainly can’t be called sissies.